AC C 20: FIN A N C IA L A C C O U N TIN G

D iscussion problem s corporation

Q uestio ns and sug g ested so lutio ns

MAIN CASE
On 1/1/2018, Wayne Enterprise received its certificate of registry from the SEC. It has 1,000,000 and
500,000 authorized common (PHP5 Par Value) and preferred stocks (PHP10 Par Value 6%),
respectively. The Corporation issued 25% of its common stocks to its five incorporators. On 3/15/2018,
50,000 preferred stocks were issued.

In 2018, the corporation issued common and preferred stocks at a premium (Problem I) and earned
PHP750,000 worth of net income. There were no dividends declared during the year. For the year 2019:
the Company was able to earn sales amounting to PHP15,000,000 with a gross profit rate of PHP30%. The
operating expenses (inclusive of PHP25,000 interest expense) amounted to PHP2,750,000. The corporate
income tax rate is 30%.

PROBLEM I. ISSUANCE OF STOCKS
Prepare the requirements enumerated below.

Common Stock
1. Prepare the journal entry assuming the issue price is PHP5.00

JOURNAL ENTRIES
Cash

Common Stock

DEBIT

1,250,000

CREDIT

1,250,000

2.

Prepare the journal entry assuming the issue price is PHP10.00.

JOURNAL ENTRIES
Cash

DEBIT

2,500,000

Common Stock

CREDIT

1,250,000

1,250,000

APIC - C/S

Cash = Issue Price x Number of Stocks Issued | (PHP10 x 250,000 stocks)
Common Stock = Par Value x Number of Stocks Issued (PHP5 x 2500,000 stocks)
Additional Paid-in-Capital = Cash Common Stock

Another account name used for APIC-C/S is SHARE PREMIUM.

3.

Prepare the journal entry assuming the issue price PHP2.50.

JOURNAL ENTRIES
Cash

Discount on C/S

Common Stock

DEBIT

625,000

625,000

CREDIT

1,250,000

Cash = Issue Price x Number of Stocks Issued | (PHP10 x 250,000 stocks)

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AC C 20: FIN A N C IA L A C C O U N TIN G

D iscussion problem s corporation
Q uestio ns and sug g ested so lutio ns

Common Stock = Par Value x Number of Stocks Issued (PHP5 x 2500,000 stocks)
Discount = Cash Common Stock

4.

5.

Prepare the journal entry for every issue price in the previous numbers assuming that there is no
par value but the Board of Directors assigned a value of PHP5

Same answers with numbers 1 to 3 because there is no difference when accounting for stocks
with par value and without par value but with stated value. The rule is applicable for Preferred
Stocks because there is no difference in accounting for Common or Preferred Stocks.

Prepare the journal entry for every issue price in the previous numbers assuming that there is no
par value and no stated value.

Issue Price is PHP5

JOURNAL ENTRIES
Cash

Common Stock

DEBIT

1,250,000

1,250,000

Issue Price is PHP10

JOURNAL ENTRIES
Cash

DEBIT

2,500,000

Common Stock

CREDIT

2,500,000

Issue Price is PHP10

JOURNAL ENTRIES
Cash

Common Stock

CREDIT

DEBIT

625,000

CREDIT

625,000

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AC C 20: FIN A N C IA L A C C O U N TIN G

D iscussion problem s corporation
Q uestio ns and sug g ested so lutio ns

Preferred Stock
1. Prepare the journal entry assuming the issue price is PHP10.00

JOURNAL ENTRY

Preferred Stock

2.

Preferred Stock
APIC - P/S

3.

500,000.00

Prepare the journal entry assuming the issue price is PHP12.00.

Cash

CREDIT

500,000.00

Cash

DEBIT

600,000.00

500,000.00
100,000.00

Prepare the journal entry assuming the issue price PHP8.

Cash
Discount on P/S

500,000.00

4.

400,000.00
100,000.00

Preferred
Stock

Prepare the journal entry for every issue price in the previous numbers assuming that there is no
par value but the Board of Directors assigned a value of PHP10.


Same with #s 1 to 3 because there is no difference in accounting for par or stated value

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AC C 20: FIN A N C IA L A C C O U N TIN G

D iscussion problem s corporation
Q uestio ns and sug g ested so lutio ns

5.

Prepare the journal entry for every issue price in the previous numbers assuming that there is no
par value and no stated value.

Issue Price is PHP10

JOURNAL ENTRIES
Cash

DEBIT
500,000

Preferred
Stock

CREDIT
500,000

Issue Price is PHP12

JOURNAL ENTRIES
Cash

Preferred Stock

Issue Price is PHP8

JOURNAL ENTRIES
Cash

DEBIT
600,000

DEBIT
400,000

Preferred Stock

CREDIT
600,000

CREDIT
400,000

All cash received by the company will be placed in the Common Stock. There is no APIC or Share Premium
because there is no Par Value, which is the minimum amount set for a stock to purchased/issued.

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AC C 20: FIN A N C IA L A C C O U N TIN G

D iscussion problem s corporation
Q uestio ns and sug g ested so lutio ns

PROBLEM II. ISSUANCE OF STOCKS NON-CASH CONSIDERATIONS
On 2/5/2018, the Company issued 50,000 shares for a non-cash asset to be given by the investor. The
non-cash asset is an equipment from the investors other company. The equipment has a historical cost
of PHP1,000,000 and accumulated depreciation is PHP200,000. The market value of the equipment is
PHP950,000. The market values of the common and preferred shares are PHP10 and PHP15, respectively.

Prepare the journal entry under the following assumptions:
1. Common stocks were issued and the market value (NCA) is available and reliable.

JOURNAL ENTRY
PPE - Machine

Common
Stock

APIC - CS

DEBIT
950,000.00

CREDIT
250,000.00
700,000.00

2. Common stocks were issued and the market value (NCA) is available but not reliable.

JOURNAL ENTRY
PPE - Machine
Common Stock

APIC - CS

DEBIT
500,000.00

CREDIT
250,000.00
250,000.00

3. Common stocks were issued and the market value (NCA and stocks) is not available.

JOURNAL ENTRY
PPE - Machine

Common
Stock

APIC - CS

DEBIT
800,000.00

CREDIT
250,000.00
550,000.00

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AC C 20: FIN A N C IA L A C C O U N TIN G

D iscussion problem s corporation
Q uestio ns and sug g ested so lutio ns

PROBLEM III. RETAINED EARNINGS

Refer to the main case.

Required:
1. Prepare the closing entries for 2018 and 2019.

FOR 2018:

JOURNAL ENTRIES
Income Summary

DEBIT

750,000

Retained Earnings

CREDIT

750,000

FOR 2019:

JOURNAL ENTRIES

DEBIT

525,000

Income Summary

Retained Earnings

CREDIT

525,000

2.

Prepare the Statement of Retained Earnings in 2018 and 2019.

Retained Earnings, 1/1/2018

Add: Net Income

0
750,000

Less: Dividends Declared During the Year

Retained, Earnings, 12/31/2018

750000

Retained Earnings, 1/1/2019
Add: Net Income

750000
525,000

Less: Dividends Declared During the Year

Retained, Earnings, 12/31/2019

0
1275000

3.

Prepare the Statement of Changes in SHE in 2018 and 2019.

Shareholder's Equity
Balance on January 1, 2018
Issued shares during the year
Net Income for The Year

Common Stock
0
1,250,000
0

APIC-C/S

Preferred Stock

0
1,250,000
0

0
500,000
0

APIC - P/S
0
100,000
0

Retained Earnings
0
0
750,000

Total
3,100,000
750,000

Balance on December 31, 2018

1,250,000

1,250,000

500,000

100,000

750,000

3,850,000

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AC C 20: FIN A N C IA L A C C O U N TIN G

D iscussion problem s corporation
Q uestio ns and sug g ested so lutio ns

Shareholder's Equity
Balance on December 31, 2019
Issued shares during the year
Net Income for The Year

Common Stock
1,250,000
-
0

APIC-C/S
1,250,000
-
0

Preferred Stock
500,000
-
0

APIC - P/S
100,000
-
0

Retained Earnings
750,000
0
525,000

Total
3,850,000
-
525,000

Balance on December 31, 2019

1,250,000

1,250,000

500,000

100,000

1,275,000

4,375,000

4.

Prepare the requirements enumerated the previous three numbers assuming that the company
incurred a net loss amounting to PHP450,000 during the year.

JOURNAL ENTRIES 2018

Retained Earnings

Income
Summary

DEBIT
450,000

CREDIT
450,000

JOURNAL ENTRIES - 2019
Income Summary

Retained
Earnings

DEBIT
525,000

CREDIT
525,000

Shareholder's Equity
Balance on January 1, 2018
Issued shares during the year
Net Loss during the year

Common Stock
0
1,250,000
0

APIC-C/S

Preferred Stock

0
1,250,000
0

0
500,000
0

APIC - P/S
0
100,000
0

Retained Earnings
0
0
(450,000)

Total
0
3,100,000
(450,000)

Balance on December 31, 2018

1,250,000

1,250,000

500,000

100,000

(450,000)

PHP2,650,000

Shareholder's Equity
Balance on December 31, 2019
Issued shares during the year
Net Income for The Year

Common Stock
1,250,000
-
0

APIC-C/S
1,250,000
-
0

Preferred Stock
500,000
-
0

APIC - P/S
100,000
-
0

Retained Earnings
(450,000)
0
525,000

Total
PHP2,650,000
-
525,000

Balance on December 31, 2019

1,250,000

1,250,000

500,000

100,000

75,000

PHP3,175,000

5.

Appropriation of Retained Earnings

Prepare the journal entry if the company decides to appropriate PHP75,000 for a capital
expenditure in the future.
JOURNAL ENTRY

DEBIT
75,000.00

Retained Earnings
Retained Earnings -
Appropriated for Capital
Expenditure

75,000.00

6.

Prepare the breakdown that will be presented in the Notes to the Financial Statements in 2019
after recording the appropriation.

RETAINED EARNINGS

CREDIT

12/31/18

Retained Earnings - Appropritiated for Capital

Expenditure
Retained Earnigns - Unappropriated

75,000
450,000

Retained Earnings

525,000

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AC C 20: FIN A N C IA L A C C O U N TIN G

D iscussion problem s corporation
Q uestio ns and sug g ested so lutio ns

PROBLEM IV. DIVIDENDS STOCK (SMALL AND BIG DECLARATION)
In addition to the main case and earnings provided in 2018 and 2019, the corporation declared stock
dividends on 4/1/2020. The corporate secretary and treasurer recorded the stocks that are entitled to
the dividends. The Market Value of the Common Stocks and Preferred Stocks at the time of declaration is
PHP8 and PHP12, respectively. On the date of distribution (5/31/2020), their market values increased to
PHP10 and PHP14, respectively.

Required: Prepare the journal entry on the date of declaration, date of record, and date of distribution.

1. The stock dividend declaration is 10% for common stock and preferred stocks.

Account
Common Stock
Preferred Stock
Number of issued stocks
250,000
50,000
Stock Dividends
10%
10%
Stock Dividends in Quantity
25,000
5,000
Market Value
8
12
Debit to Retained Earnings
200,000
60,000

Date of Declaration:
Retained Earnings

Stock Dividend
Distributable - C/S

APIC - C/S
Stock Dividend
Distributable - P/S

APIC - P/S

Date of Record:
No Journal Entry
Date of Distribution:
SDD - C/S
SDD - P/S

260,000.00

125,000.00
135,000.00

50,000.00
10,000.00

125,000
50,000

Common Stock
Preferred Stock

125,000
50,000

Stock Dividend Distribution is an Equity Account. It will be used until the stock certificates are
distributed to the owners.

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AC C 20: FIN A N C IA L A C C O U N TIN G

D iscussion problem s corporation
Q uestio ns and sug g ested so lutio ns

2.

The stock dividend declaration is 30% for common and preferred stocks.

Date of Declaration:
Retained Earnings

Date of Record:
No Journal Entry

Date
of Distribution:
SDD - C/S
SDD - P/S

Stock Dividend Distributable -
C/S
Stock Dividend Distributable -
P/S

260,000.00

125,000.00

50,000.00

Common
Stock
Preferred Stock

125,000
50,000

125,000
50,000

PROBLEM V. DIVIDENDS CASH
In addition to the main case and earnings provided in 2018 and 2019, the corporation declared cash
dividend of PHP0.75 per share will be distributed to common shareholders on 4/1/2020. The minimum
rate of return of the preferred stocks is 6%. The corporate secretary and treasurer recorded the stocks
that are entitled to the dividends. The dividends were paid on 5/31/2020.

Required: Prepare the journal entry on the date of declaration, date of record, and date of payment
under the assumptions set below.

1. The Preferred Stocks are non-cumulative.

Number of Preferred Stocks
Par Value
Preferred Stocks
Minimum Rate of Return
Minimum Dividends

50,000
10
500,000
6%
30,000

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D iscussion problem s corporation
Q uestio ns and sug g ested so lutio ns

Date of Declaration:
Retained Earnings

Dividends Payable - P/S

Dividends Payable - C/S

217,500.00

187,500.00
30,000.00

Date of Record:
No Journal Entry
Date of Payment

Dividends Payable - C/S

187,500.00

Dividends Payable - P/S

30,000.00

Cash

217,500.00

2.

The Preferred Stocks are cumulative.

Dividends Not Declared - 2018

30,000

Dividends Not Declared - 2019

30,000

Dividends Not Declared - 2020

30,000

DIVIDENDS - PREFERRED

90,000

Date of Declaration:
Retained Earnings

Dividends Payable - C/S

Dividends Payable - P/S

Date of Record:
No Journal Entry

Date
of Payment
Dividends Payable - C/S
Dividends Payable - P/S

187,500.00
90,000.00

187,500
90,000

Cash

277,500.00

277,500

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AC C 20: FIN A N C IA L A C C O U N TIN G

D iscussion problem s corporation
Q uestio ns and sug g ested so lutio ns

PROBLEM VI. STOCK SPLIT
The corporation declared a stock-split at the beginning of 2020.

Required: Prepare the journal entries under the following assumptions per item. Determine the new par
value, total common stock, total number of shares.
1.) The stock split is 1-for-2
2.) The stock split is 1-for-3
3.) The stock split is 1-for-4

Stock Split 1-for-2:

SCENARIO
Before Stock Split
Stock-Split
After Stock Split

BALANCE
1,250,000.00
0

QTY
250,000.00
2.00

1,250,000.00

500,000.00

PAR VALUE
5.00
-
2.50

Stock Split 1-for-3:

SCENARIO
Before Stock Split
Stock-Split
After Stock Split

BALANCE
1,250,000.00
0

QTY
250,000.00
3.00

1,250,000.00

750,000.00

PAR VALUE
5.00
-
1.67

Stock Split 1-for-4

SCENARIO
Before Stock Split
Stock-Split
After Stock Split

BALANCE
1,250,000.00
0
1,250,000.00

QTY
250,000.00
4.00
1,000,000.00

PAR VALUE
5.00
-
1.25

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AC C 20: FIN A N C IA L A C C O U N TIN G

D iscussion problem s corporation
Q uestio ns and sug g ested so lutio ns

PROBLEM VII. TREASURY STOCKS (REACQUISITION AND REISSUANCE)
On 1/5/2018, the Company reacquired 2,000 shares amounting to PHP20 each. The shares were sold the
investors in three different transaction. On 2/1/2018, 800 shares were sold at PHP25. Exactly fifteen
days later, 700 shares were issued for PHP11,000. The remaining shares were reissued at PHP10 per
share.

Required: Prepare the journal entries to record the transactions above.

JOURNAL ENTRY

DEBIT

Treasury Stock
Cash

Cash

Treasury Stock

APIC - T/S

Cash
APIC - TS

Treasury Stock

Cash
APIC - TS
Retained Earnings

CREDIT

40,000.00
40,000.00

20,000.00

16,000.00
4,000.00

11,000.00
3,000.00

14,000.00

Treasury Stock

5,000.00
1,000.00
4,000.00

10,000.0

Treasury Stocks is a contra-equity account. Its normal balance is Debit because it negates capital accounts.

When Treasury Stocks are sold to investors, any excess between the considerations received and cost the
treasury stocks were originally acquired will be placed in Additional Paid-in Capital Treasury Shares.

When Treasury Stocks are sold to investors, any deficiency between the considerations received and cost
of the treasury stocks were originally acquired will first be charged to APIC T/S. If the APIC T/S has no
more balance, it will be charged to Retained Earnings

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